Over the past ten years, many economists who feared a global crisis predicted a sudden adjustment of current account imbalances and “disorderly” crash of the dollar, leading to a major international shock to confidence and demand — and possible stagflation in the United States.
As it turned out, these imbalances were not the main cause of the crisis that swept the world last year, Oxford Anytica says in "Renminbi appreciation is unlikely". In fact, the dollar appreciated as investors sought the perceived security of US assets. However, there is still risk of a chaotic, sudden adjustment that would further depress global demand and exacerbate the slump. The challenge for policymakers is much the same one that they have been facing for the past decade: find ways gradually to manage an orderly international adjustment in order to head off a disorderly one.
China’s role. There are two main ways for China to contribute to dealing with the current account imbalances:
- One is to reduce its high domestic savings rate, partly by developing its social safety net — which would alleviate the need for individuals to amass wealth in case of poor health or unemployment.
- The second is to allow the renminbi to appreciate in real terms.
A stable world economy is good for China. However, in the short term, appreciation would be a burden for China — though probably not a large one. China is growing faster than any other large economy — but it is still struggling with weak aggregate demand and GDP growth that is below potential. Appreciation would further diminish external demand for Chinese goods at a time when Beijing is furiously implementing a fiscal stimulus and encouraging domestic consumers in order to keep growth strong.
In the near term, an orderly renminbi appreciation would be good for the United States. It would mean a boost in exports — though this effect would by no means be large enough to close the output gap and moderate unemployment.
Worries about US dependence on Chinese official purchases of US assets to finance the current account deficit are overblown.
A smaller current account deficit means more demand for US output — and a smaller deficit also means less external financing is necessary. The one risk is that an abrupt, poorly managed reduction in foreign exchange reserve accumulation by Beijing could spark a disorderly adjustment.
Other economies stand to benefit modestly from an orderly renminbi appreciation in much the same way that the United States would. One exception is the scenario where China simply allows a bilateral appreciation against the dollar, but keeps the renminbi steady in real terms. China might accomplish this by reallocating reserves away from dollar assets towards other currencies. In this case, the United States would receive a fillip to external demand while other countries miss out.
Policymakers now seeking an international consensus to manage exchange-rate adjustment face a somewhat new set of incentives. In particular, China would bear a modest burden from a renminbi appreciation — while the United States and other countries stand to receive some benefit. At any rate, because of other international challenges — including North Korea — the Obama administration will likely continue to be reluctant to pressure China on the currency issues.